Corporate pay ratios mask how little we know

In tweets and articles, Abigail Disney — a filmmaker, activist and notably the granddaughter of one of the company’s founders — has called out the Walt Disney Co. for paying its CEO Bob Iger an “insane” $65.6 million in 2018. That is more than 1,424 times the median salary of a Disney employee, a disparity she says has a “corrosive effect on society.”

In its defense, Disney pointed out that it has made “historic investments to expand the earning potential and upward mobility” of its employees, introducing a minimum wage of $15 at Disneyland, along with an educational initiative for hourly employees.

So, is Disney exacerbating income inequality — or is it improving the lives of its 200,000-plus employees? A CEO-to-median pay ratio of 1,424 to 1 is certainly shocking — but such numbers are a shiny decoy, distracting us from how little we actually know about the particular pay practices of large companies.

Pay ratios are now headline news because of a controversial provision in the 2010 Dodd-Frank Act, passed in the wake of the financial crisis. It requires publicly traded companies to report their median employee pay ($46,127 in Disney’s case) and calculate the CEO pay ratio. Since mandatory reporting began last year, these ratios have captured public attention in ways that the typically technical corporate disclosure documents never do.

Progressive politicians, including Sens. Elizabeth Warren and Bernie Sanders, have cited the CEO-to-worker pay ratios when proposing new business regulation bills. The city of Portland, Ore., imposed a penalty business tax on firms where the pay ratio exceeds 100 to 1. Similar measures have been proposed in states including California, Illinois and Massachusetts, and at the federal level.

But when we analyzed the pay ratio, we found it is highly problematic. Yes, maybe it’s interesting to step into the shoes of the hypothetical median worker whose yearly paycheck is less than what the CEO earns in two hours. It’s also tempting see how companies stack up. Discovery Inc. (pay ratio 1,511 to 1) looks worse than Disney, while CBS (pay ratio 263 to 1) appears much better. But such comparisons are meaningless to the point of being misleading. These things tell us nothing useful about the pay practices, or inequities, of organizations. The compensation packages of tens of thousands of unique employees cannot be reduced to a single number.

In the case of Disney, for instance, we know nothing about the earnings of the 100,000 workers who, by definition, get less than the median. How many get just the minimum wage? How many receive a living wage, tailored to the cost of living where they work?

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Do Disney’s employees own some company stock, aligning employee pay with corporate performance? Do they receive benefits, training and retraining opportunities? Given that a skilled workforce is just as valuable — and needs to be managed just as carefully — as financial capital, how does Disney manage its “human capital”?

If Disney and all other public companies were required to provide this type of information to investors and regulators, we might amass data that really would tell us something about pay inequities in individual companies and income inequality in society more broadly. But under the current regulatory regime, no information about employee compensation is required to be disclosed except the median pay and the flawed ratio.

This is especially odd given how much information firms have to provide about executive compensation each year; that adds up to dozens of pages detailing pay practices for just a handful of executives. In other words, labor as a factor of production — aside from executive labor — is practically invisible in corporate filings.

Corporate reports need to bring workers out of the shadows. Disclosure can’t be a substitute for more substantive policy measures — but without meaningful worker pay information we can’t intelligently debate the problems or the solutions related to income inequality or wealth concentration.

There have been some small moves in this direction. Investors, including the world’s largest fund, BlackRock, have started to demand information about human capital management practices as a way to assess how well a company is run. Last month, the investor advisory committee attached to the Securities and Exchange Commission recommended that the SEC consider expanding its disclosure requirements to cover this topic. The recommendation faced strong opposition, however, and it’s unlikely the SEC will make this a priority in the near term.

Meanwhile, highly visible companies that trade on their reputation, such as Disney, can expect to face this kind of fallout each spring when they release their headline-grabbing CEO compensation and pay ratio figures. And how Disney decides to respond to the rising tide of income inequality may well determine whether Americans continue to think of it as “the happiest place on Earth.”

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Steven A. Bank and George S. Georgiev are professors of corporate law at UCLA and Emory University, respectively.

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